The Christmas trading period is important for retailers. For some, it can make or break their year.
There was a deal of apprehension heading into Christmas 2022 — among both investors and businesses.
Most retail stocks — and stocks in other sectors exposed to discretionary consumer spending — fell out of favour with investors during the year, as inflation soared.
And there were ominous noises coming from some businesses. Toys, games and giftware group Character said in October that it anticipated challenging conditions in the “all-important Christmas trading period,” with an “expected curtailment of consumer spending … due to concerns over cost-of-living increases.”
Two weeks into January, we’ve already had a bevy of trading updates from retailers. How did they fare, and what are their prospects for 2023?
Ups and downs
Here’s how the market responded — share price moves on the day — to the updates issued by retailers in the first two weeks of the year:
JD Sports Fashion: +7.0%
Shoe Zone: +5.4%
Card Factory: +5.0%
DFS Furniture: +1.5%
Marks and Spencer: +1.3%
B&M European Vale Retail: +0.5%
Topps Tiles: -0.6%
N Brown: -1.1%
J Sainsbury: -1.6%
Games Workshop: -2.5%
AO World: -5.4%
Virgin Wines UK: -24.1%
Troubled online fashion retailer ASOS was a big riser. However, this was more about its new chief executive’s turnaround plans than sales, which were down 6%.
Online retail was weaker generally, with disruptive Royal Mail strikes this year, compared with a boost to digital sales last year from the coronavirus Omicron variant.
Virgin Wines, which issued a profit warning, was a big online casualty, as it suffered additionally from major problems caused by a new warehouse management system.
The two other double-digit fallers also warned on profits. Hornby said its warning was as a result of the “challenging consumer economic climate”.
Halfords blamed an inability to recruit enough skilled auto technicians, as well as expectations of “a deeper decline in demand for more discretionary high-ticket items”.
Elsewhere in the high-ticket space, AO World’s shares were down on the day. DFS Furniture saw a modest uptick, but cautioned that meeting forecasts for its June financial year-end will be dependent on continuing order momentum.
Updates from clothing retailers JD Sports Fashion, NEXT and Shoe Zone were all very well received by the market.
High street bellwether Next lifted its profit guidance for the year to £860m from £840m after a strong sales performance.
However, its initial guidance for the year ahead is that sales and profits will fall 1.5% and 7.6%, although it conceded that “some might think this forecast is overly cautious.”
Cash and credit
For the most part, retailers had a decent Christmas. Cost-of-living crisis there may be, but it appears plenty of consumers splashed cash on the festive season.
At the same time, an early-January poll for the BBC showed a third of respondents who used credit to help get through Christmas said they weren’t confident about their ability to repay. And debt advice charity StepChange reported a surge in post-Christmas enquiries.
Outlook for 2023
It remains to be seen whether consumers have had a final splurge, and will now slash their discretionary spending. If so, we could see downgrades to retailers’ profit forecasts as 2023 progresses.
On the other hand, if cost-of-living pressures were to begin easing, it could be a different story. And, for example, Next’s forecasts for the year could indeed prove “overly cautious.”
As ever, there’s a range of possible deviations from the market’s view of the economic outlook at the start of the year.
That’s why, here at The Motley Fool, we focus on the long term. We want to invest in companies not on how we think their businesses and share prices might perform in the coming quarter, half-year, or year, but across multi-year economic cycles.
Retail shares are currently depressed on the prevailing market view of the near-term outlook for the economy. This suggests there could be opportunities in the sector for long-term investors to buy today and reap high future rewards for their patience.
There are some great companies out there, with good management teams, sound business models, and robust balance sheets. What rational investor wouldn’t want to own a slice of such a business when it can be bought at a knock-down price?
Graham has no position in any of the shares mentioned in this article. The Motley Fool UK has recommended Games Workshop Group Plc, J Sainsbury Plc, and Tesco Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2023